This week Dominic Coyle answers queries on First Active, Eircom rental and Inheritance

First Active

Like many taxpayers, I am endeavouring to finalise my tax affairs for the year 2003. At this moment, I have to hand your response to a query raised by an Irish Times reader (November 14th, 2003) regarding First Active shares, which I find very interesting.

I was awarded 450 free shares and on the same date purchased another 421. I held these shares until the takeover by Ulster Bank.

Following your example, I computed that I have no liability for capital gains tax. However, on looking up the Revenue site, I found their treatment of the same scenario will make me liable for a charge of 700. Am I having problems with my maths?

Ms M.C., email

There are two things that immediately come to mind. First, your capital gains tax liability in relation to the eventual sale of First Active would accrue this year, 2004, and not 2003. Second, the answer to which you refer related to the capital reduction programme at First Active, which took place in June 2003 and not to the eventual sale of the company to Royal Bank of Scotland.

The response last November was provided by KPMG, financial advisers to First Active, and deals specifically with the question of the bonus shares issued as part of the capital reduction programme, how they are treated and how best to dispose of them.

In that capital reduction programme, each First Active shareholder received 1.12 for every share they held. This was paid by technically issuing the two bonus shares per share held and then cashing them in at 56 cents per share.

The advice from Ms Sharon Burke, tax partner at the accountancy firm, was that the way of minimising both any exposure to capital gains tax in 2003 in respect of the capital reduction programme and of reducing the exposure to capital gains in 2004 as a result of the acquisition of the balance of the shares by Royal Bank of Scotland, was to choose carefully which shares to offload in the capital reduction programme.

This "choice" was possible because the free and bought shares were "acquired" the same day - the day of the flotation.

Basically, before you started, you had 450 free shares and 421 bought shares, together with 45 loyalty shares acquired on the first and second anniversary of the flotation. This entitled you to 1,832 bonus shares, of which 1,742 were in respect of the shares acquired on day one.

Ms Burke suggested you "opt" to offload all the free shares held - in your case the original windfall of 450 shares and the 900 "bonus" shares attached to it. These would all have a nil purchase value as they were "acquired" free. Thus, the full 56 cents per share price would count as a gain.

This makes 1,350 shares, leaving you 482 shares short of the 1,832 shares to be encashed at 56 cents each. The balance comes from the bonus shares attached to the 421 "bought" shares. These were bought for 2.86 each but with two bonus shares attached to them, that number needs to be divided into three, making each worth 95.3 cents.

So the 482 shares "cost" you 95.3 cents and will be sold for 56 cents, effectively making you a 39.3 cent loss per share.

The outcome of all this is that you will have a "gain" of 566.57 as a result of the capital reduction exercise, far short of the 1,270 limit at which capital gains kicks in.

So much for 2003. In 2004, you will have 781 shares ( original bought shares with their attendant bonus shares) to sell to RBS. With a post-bonus share value of 95.3 cents each, these will net you 5.247 (at the RBS offer price of €6.20), or a total of 4,097.91.

On top of that you have the 45 loyalty shares and their attendant bonus shares on which you will have to work out the gain. Each of these 135 shares is worth a third of the share price on the day they were received - remember some came in October 1999 and some a year later. Remember also, that indexation will apply - at least up the end of 2002. Whatever way you look at it, you will have a capital gains tax bill this year.

You quote a particular scenario, example 4, on the Revenue website. I assume this is the part of the site dealing with capital gains tax on shares and would suggest that the more appropriate example is 2.

A final point is that if a capital gains liability had arisen in relation to the capital reduction, it would have been due by the end of October last year under the new rules governing capital gains assessment.

Eircom rental

Last week, I responded to a query about the fact that pensioners will now have to pay part of their line rental where previously this was paid for by an allowance from the Department of Social and Family Affairs.

The piece may have left the impression that the Government has withdrawn the allowance totally, leaving pensioners facing a bill of €25.17 a month or 50.34 per two-month billing period for line rental. This is not so.

The Government has simply failed to increase its allowance to match the 47 cents per month increase announced by Eircom for providing phone lines to eligible pensioners. As a result, pensioners will face a bill of 47 cents per month or 84 cents per two-month billing period.

It's not a lot but the point is that it breaks, for the first time, the link between line rental cost and the matching allowance.

Inheritance

My mum received an inheritance in 1989 of £6,000 sterling from her late brother who resided in the UK. She opened a UK bank account at the time and lodged the money there, and it has remained there since.

She has recently received a letter from the bank advising of the Revenue investigation into offshore accounts held by Irish residents. Would she have been liable for tax on the inheritance in 1989? Is she liable for tax now if and when she repatriates the money? Does she need to do anything regarding the Revenue investigation?

She is a pensioner (and so not a taxpayer now) but she would have been a part-time worker in 1989.

Mr N.C., Dublin

You really have no time to waste. Put simply, you need to get to the Revenue before they get to you. Whether your mother would have been liable for Irish tax back in 1989 depends on whether her brother was "domiciled" in Britain or Ireland. The threshold amount for 1989 and earlier years was £20,000. If this inheritance plus previous gifts and inheritances was more than this amount, capital acquisitions tax is payable.

She is certainly liable for tax now whether she repatriates the money or not. As a taxpayer at the time, she would be liable to DIRT on bank deposits.

She should immediately contact the Revenue and clarify the situation, as she faces the prospect of interest and penalties on top of any interest due. Details of how to calculate these and how to make a statement of disclosure can be found in a Revenue booklet, "Making a Qualifying Disclosure of an Offshore Related Tax Default to Revenue", which can be got from any tax office.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries.